Being too clever means you miss the coffee cups
June 13, 2019
Affinity Insights – Issue 9 June 2019
June 13, 2019

The Importance of culture for investors

One of the important take outs from of the Banking Royal Commission is that poor corporate culture not only leads to bad outcomes for customers but also for investors.

Commissioner Kenneth Hayne harshly criticised NAB for a culture that did not genuinely admit its failures.

 


Unhappy clients affected by the fees-for-no-service scandal joined disgruntled shareholders who have seen their shares fall in value by more than 20 per cent over the past five years.

While admittedly not a like-for-like comparison, a company famous for its focus on culture — Netflix — is up more than 450 per cent over the same period. These are not isolated examples.

Numerous studies demonstrate that companies with a positive workplace culture consistently deliver superior investment returns.

Research by Harvard Business School suggests that companies with “performance-enhancing cultures” had average revenue growth four times higher than firms with poor culture.

The challenge for investors is being able to assess corporate culture from the outside, particularly, as pointed out by the Royal Commission, there is often a profound disconnect between a company’s public pronouncements and its day-to-day actions.

Some companies are explicit about their cultural expectations, such as Netflix’s 100-plus page “Freedom & Responsibility” document, famously described by Facebook chief operating officer and billionaire Sheryl Sandberg as “the most important document ever to come out of Silicon Valley”.

However, most public information, such as annual reports, shed little light on what is really happening inside an organisation. So, here are some ways that you might determine whether a company deserves your investment based on its culture.

What employees say about a company

Understanding what employees feel about their experience of working for a company can be instructive.

While online services such as Glassdoor are designed for job applicants, it is also a valuable resource for investors.

With hundreds and, in some cases, thousands of reviews by current and former employees aggregated to company ratings, the free service avoids the problems of small samples or the views of a vocal minority of disgruntled employees.

Staff turnover

The number of staff leaving a company over time is a window into culture which is often publicly accessible.

Generally, low turnover is a good sign, as teamwork takes time to develop and longer-serving employees are better trained.

However, in some instances, very low staff turnover is a bad sign, demonstrating management complacency or unwillingness to address underperformance.

Executive remuneration

The quantum and method of senior management pay sets the tone from the top and is disclosed in listed company annual reports.

Salary packages, which have a significant deferred component dependent upon performance and behaviour, is now mandatory in large financial institutions, with smaller organisations soon to follow.

As the Royal Commission pointed out, for meaningful cultural impact, it is essential that genuine consequences, such as the loss of cash and share bonuses for the most senior people, follow poor performance.

According to Netflix, “many companies have value statements but often these written values are vague and ignored. The real values of a firm are shown by who gets rewarded or let go”.

Sometimes, the most telling assessment of a company’s culture is the direct interaction with the people and products themselves.

If staff are happy to go the extra mile and seem genuinely pleased to be at work, that’s a good sign.

If there are problems returning faulty goods, telephones go unanswered or staff are surly and unhelpful — even if profitability looks good today — cultural problems are likely to undermine your returns as an investor.

 

Article by Catherine Robson. Published by The Sydney Morning Herald, March 10, 2019. Find the original article on The Sydney Morning Herald here